Warning that inflation risk could hit defence procurement

The Defence Committee heard this week that failure to reform defence finance and procurement could drive inflation across major equipment programmes, as MPs pressed the Government on access to private capital and the rising cost of military capability.

Giving evidence to the Defence Committee this week, Defence Secretary John Healey said the UK faces a growing risk of paying more for the same level of military output if structural issues in defence finance are not addressed, the UK Defence Journal understands. The exchange centred on the ability of banks and investors to lend to defence companies, particularly as industry seeks to expand production capacity in response to increased demand. Labour MP Alex Baker told the committee that regulatory barriers were preventing capital from flowing into the sector, limiting industry’s ability to scale.

Healey said attitudes within the investor community were beginning to shift, arguing that defence was increasingly viewed as a legitimate and necessary form of ethical investment.

“You do not have economic stability without national security, and nor do you have a stable society,” he told MPs, adding that defence investment was no longer seen as incompatible with responsible finance.

He said the Government was now focused not only on public spending but on leveraging private finance alongside it, including venture capital and foreign direct investment, while also seeking tougher contractual terms with defence suppliers. Healey pointed to the creation of a new defence exports office and growing overseas sales as part of a broader effort to strengthen the industrial base, noting that foreign direct investment into UK defence reached £1.4 billion last year.

However, Baker warned that despite progress, banks still struggled to lend to defence firms at scale, arguing that without sovereign-backed guarantees, industry would remain constrained. “All we are going to do is drive inflation,” she said. “We are going to buy the same amount of kit; it is just going to cost more.”

Healey agreed that inflation posed a serious risk if procurement reform and investment models did not change. “That is a really big risk if we do not do our procurement better and in different ways,” he said, adding that greater use of private capital and foreign investment would be necessary to prevent costs escalating.

Permanent Secretary Jeremy Pocklington told the committee that engagement with banks and financial institutions had improved, describing new dialogue as a way to overcome long-standing barriers to defence lending.